POLICY RESEARCH WORKING PAPER 2120
Ccain Africa Export Africa's poor performance in
manufactured exports In the
M anufactures? 1 990s ireiadive to EasAsjai
appears to be largely the
result of bad policies-
The Role of Endowment, Exchange especially polices that affect
Rates, and Transaction Costs transaction costs.
Ibrahim A. Elbadawi
The World Bank
Development Research Group
Public Economics
April 1999
POLICY RESFARCH WORKING PAPER 2120
Summary findings
Elbadawi analyzes the determinants of manufactured Elbadawi tests the implications of these three views
exports in Africa and other developing countries, guided with an empirical model of manufactured export
by three pivotal views on Sub-Saharan Africa's (Africa's) performance (manufactured exports' share of GDP),
prospects in manufactured exports: using a panel of 41 countries for 1980-95. His findings:
Adrian Woods holds that Africa cannot have * Corroborate the predictions of the transaction
comparative advantage in exports of labor-intensive thesis, in that transaction costs are major determinants of
manufactures (even if broadlv defined to include raw manufactures exports. Investing in reducing these costs
material processing) because its natural resources generates the highest payoff for export capacity.
endowment is greater than its human resources * Lend support for the exchange rate-led strategy.
endowment (endowment thesis). After controlling for other factors, ratios of natural
* Paul Collier argues that, for most of Africa, resources per worker were not robustly associated with
unusually high (policy-induced) transaction costs are the export performance across countries, but this cannot be
main source of Africa's comparative disadvantage in taken as formal rejection of the endowment thesis -
manufactured exports (transaction thesis). unless one is prepared to assume that manufactured
* A third approach (Elbadawi and Helleiner) exports' share of GDP was highly correlated with ratios
emphasizes the importance of stable, competitive real of manufactured to aggregate (or primary) exports. But
exchange rates for profitability of exports in low-income this is not unlikely.
countries (exchange rate-led strategy).
This paper - a product of Public Economics, Development Research Group -is part of a larger effort in the group to
research manufactures exports' competitiveness. Copies of the paper are available free from the World Bank, 1818 H Street
NW, Washington, DC 20433. Please contact Hedy Sladovich, room MC2-609, telephone 202-473-7698, fax 202-522-
1154, Internet address hsladovich@worldbank.org. Policy Research Working Papers are also posted on the Web at http:/
/www.worldbank.org/html/dec/Publications/'Workpapers/home.html. The author may be contacted at ielbadawi
(cworldbank.org. May 1999. (19 pages)
The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about
developrnent issues. An objective of the series is to get the findings out quickly, even if the presenitations are less thanz fully polished. The
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countries they represent.
Produced by the Policy Research Disseminationi Center
Can Africa Export Manufactures? The Role of
Endowment, Exchange Rates and Transaction
Costs
Ibrahim A. Elbadawi
Development Research Group and Africa Region, World Bank
Washington, D.C. 20433, USA
e-mail: ielbadawi@worldbank.org
An earlier version of this paper was presented at the AERC/OECD/IMF workshop on "Policies for
Competitiveness in Manufacturing in Sub-Saharan Africa", Johannesburg, South Africa, November 6-7, 1998. I
would like to acknowledge, without implication, helpful comments from Mustapha Nabli and other participants at
the workshop. The author would like to acknowledge the research assistance by John Randa and Rajal Upadhyaya.
1. Introduction
The marginalization of Sub-Saharan Africa (hereafter Africa) in world trade, especially the
global market for manufactured exports, has provided one of the most visible
manifestations of the multi-faceted development failures of the Sub-Continent over the last
thirty years or so. Moreover, the lessons from recent development success stories suggest
that they have either been facilitated by export-orientation (e.g. Korea and Taiwan) or
have in fact been export-led (e.g. Chile, Mauritius, Tunisia and South East Asia),.
Therefore, it is not surprising that current academic and policy debates on Africa's
development have been preoccupied with addressing the key question about how might
Africa be able to build a strong comparative advantage in exports, especially exports of
labor-intensive manufactures?2. More recent research has focused on the impact on
Africa's comparative advantage in manufactured exports of globalization of trade and
capital markets'; and of the role of endowment, location and geography". This new
research and more importantly the changing landscape of global trade and international
finance have pushed the debate towards more strategic issues such as: can Africa ever hope
to have comparative advantage in manufactured exports?; can globalization facilitate (if
not partially substitute for) traditional and usually complex strategies for achieving
export-led economic transformation?; or is there a scope for poor African countries to
jurnp-start their competitiveness through the "old -fashioned way" of sustained real
currency depreciation in a world of capital market integration?
Export performance in many African countries has been responsive to macroeconomic
reforms-especially to the deep real exchange rate depreciation in the 1980s in Anglophone
Africa and since 1994 in the CFA zone of Francophone Africa. However, given the
partiality of reforms and the frequent adverse terms of trade shocks that have impacted
the region, observed growth patterns in aggregate exports, and especially in manufactured
exports, have been neither deep nor stable (e.g. Rodrik, 1997). Even as Africa is still
working on regaining its lost ground in the international market for traditional exports,
there is a broad consensus that the ultimate goal of export-orientation in Africa should be
to achieve significant export diversification, through building new comparative advantages
in non-traditional exports, including labor-intensive manufactured exports. Manufactured
exports as well as some other non-traditional exports, are more capable than traditional
primary exports in supporting sustained overall economic growth for at least three
reasons. First, compared to primary goods exports, manufactured exports are likely to
grow faster when the global economy is expanding because their income elasticity of
demand is higher. Second, due to the relatively higher price elasticities of demand and
I Perhaps unlike many other recent successful development experiences, Rodrik (1994,95) shows that
even though export-orientation has facilitated the sustenance of high investment productivity in Korea and
Taiwan for decades, both overall growth as well as the phenomenal export expansions in these two
countries have been driven by sustained investment booms.
2 See for example World Bank, 1998a,b; Elbadawi, 1998; Sekkat and Varoudakis, 1998.
For example, Collier, 1997; Elbadawi and Helleiner, 1998; and World Bank, 1998a.
4For example, Wood, 1997; Wood and Berge, 1997; Wood and Owens, 1997; and Wood and Mayer,
1998.
2.
supply for manufactures compared to primary goods exports, the former are less
susceptible to price variability. Third, the prospects for dynamic productivity gains are
much higher in the manufacturing sector. Therefore, in the medium to longer runs the
role of traditional primary exports should be to facilitate export diversification. However,
in the short-run Africa should continue to consolidate recently achieved gains by avoiding
economy-wide indirect taxation of traditional exports. For financing the process of export
diversification, only moderate and sector-specific taxes should be imposed.
Against this background, this paper contributes to this debate by estimating manufactured
exports performance for a panel of African and other developing countries, taking into
consideration endowment and geography and the potential effect of globalization. In
particular, I will use the empirical model to assess the implications of three views on this
issue. First, Adrian Wood and his research associates use a version of Hecksher-Ohlin
model to argue that, under globalization, human capital and natural resource endowment
rather than labor and capita are the main determinants of comparative advantage for
manufactured exports. I call this view the endowment theory. This theory predicts that
Africa basically has no prospects in manufactured exports because of its high natural
resource endowment and low stock of human capital. Paul Collier uses a modified
Hecksher-Ohlin framework and argues that Wood's prediction could only be valid if
Africa is affected by a massive Dutch Disease problem because of its richness in natural
resources, which however, is not supported by evidence (Collier, 1997). Instead, Collier
develops an alternative theory (I call the transaction theory), which argues that because
manufacturing is one of the most transaction-intensive activities, Africa's comparative
disadvantage (at least in the short-to-medium runs) has been caused by high transaction
costs due to poor policy environment. Following his critique of the endowment theory,
Collier proposes a strategy for building Africa's comparative advantage, based on increased
integration of African economies into global world trade, capital and risk-bearing markets.
Finally, Gerry Helleiner and I argue that given Africa's current levels of development,
comparative advantage in exports should be based on sustained real exchange rate
competitiveness, until the economies are sufficiently developed to support a productivity-
induced secular process of real appreciation (Elbadawi and Helleiner, 1998). This real
exchange rate-led strategy also recognizes the dire need for re-capitalization of African
economies to sustain the process of export expansion and export diversification, as has
been convincingly argued by Collier (1997). However, Helleiner and I also argue that to
protect macroeconomic competitiveness as well as to avoid possible future financial and
currency crises, flexible and pragmatic approaches for integrating Africa into global capital
markets may have to be adopted.
Section 2 provides preliminary country-specific and regional analysis of the evolution of
manufactured exports and some of the key relevant variables over the 1980s and 1990s.
Section 3 contains a discussion of the estimation results, including an assessment of the
implications of the three views discussed above. The model of section 3 estimates the
determinants of manufactured exports/GDP using a panel covering about 41 countries
over the period 1980-95. The analysis of section 3 does not however, directly test the
above views, since I estimate performance equations based on the ratio of manufactured
3
exports to GDP, rather than comparative advantage equations using, for example, the
share of manufactured to aggregate exports as the dependent variable5. Section 4
concludes.
2. Manufactured Exports in Africa and Other Developing Regions
Manufactured export performance between 1980s and 1990s (1994/95 relative to 1984/85)
has varied considerably across eleven countries drawn from three developing regions,
seven of which are Sub-Saharan African countries (Table 1.A)6. The best performers in
terms of the growth rates of manufactured export (MNEX) to GDP between the two
periods are: Kenya (14%), Tanzania (10.6%), Burkina Faso (9.5%) and South Africa (8.1%).
If we take the share of MNEX to GDP into account, the growth rates of Mauritius at
7.7% was impressive, given that the share of MNEX in its economy is more than 27%.
To a lesser extent, the same assessment applies to Kenya and South Africa, for which the
shares of MNEX to GDP are 6.5 and 8.6%, respectively. The second category consists of
Burkina Faso and Tanzania, which achieved relatively high rates of MNEX growth,
though starting from low shares of MNEX to GDP (at respectively, 2.2 and 1.3% in
1994/95). The third category consists of Cote d'Ivoire and Zimbabwe, which experienced
less than 5% rates of growth in MNEX, though they have had relatively low to moderate
shares of MNEX to GDP (at 5.7 and 9.9%, respectively). As the Table makes clear, except
for Mauritius, all other Sub-Saharan African countries have much lower share of MNEX
compared to world class performers such as Tunisia, Indonesia, Thailand, and especially
Malaysia7. Moreover, all the African countries experienced lower growth rates in MNEX
than the three Asian countries. Therefore, assuming that manufactured exports--
especially labor-intensive manufactured exports-are likely to be the most efficient engine
of growth for Africa as it have been for other successful developing countries, African
countries do not only need to significantly raise growth rates of MNEX, but they would
also need to sustain them for a considerable time.
For the remainder of this section, I briefly review the extent to which MNEX
performances of various countries in the sample were covariated with four sets of
determinants: exchange rate policy, transaction costs, stock of skills relative to natural
resource endowment, and aggregate investment (Table 1.B). The first three correspond to
the three strategies discussed in the introduction to this paper, while the latter is associated
with overall economic performance, including manufactured export growth. In fact
Rodrik (1999) argues that the phenomenal expansions of exports in Korea and Taiwan
were made possible by sustained rise in private returns to capital, engineered by the two
I For a detailed discussion and direct testing of the three views, see Elbadawi and Randa (1999).
'In addition to the North African country of Tunisia, the other seven African countries are: Burkina Faso, Cote
d'Ivoire, Kenya, Mauritius, South Africa, Tanzania and Zimbabwe. The other three non-African countries are
Indonesia, Malaysia and Thailand.
I Until the recent financial crisis, the three Asian countries rank among the most accomplished exporting
economies in the world.
4~
governments through a -range of strategic interventions--which include investment
subsidies, administrative guidance, and the use of public enterprise. He also echoes this
theme in his recent explanation of Africa's marginalization in world trade, though he does
not suggest that Africa should pursue similar strategies to those adopted by the two
successful Asian countries (Rodrik, 1997).
First, I analyze the evidence on the relationship between exchange rate policy and MNEX
performance. Figure 1 depicts average MNEX/GDP ratios during 1990-95 for several
countries together with indexes of real exchange rate (RER), RER misalignment
(RERMIS) (measured as undervaluation relative to an equilibrium level ERER) and RER
variability (see notes to Figure 1).
The figure suggests three important patterns. First, Indonesia, Thailand, Tunisia,
Republic of Korea, Mauritius, Malaysia constitute a group of six countries that have
managed to maintain large MNEX relative to the share of their economies (ranging from
about 12% of GDP for Indonesia to 63% for Malaysia). Relative to other countries, these
countries were also the ones with uniformly more stable RER. Among the countries with
lower than 10% MNEX/GDP ratios only Chile and South Africa have achieved high
degree of RER stability. Second, there is a tendency for national real currencies to become
stronger (more appreciated) as the share of MNEX/GDP reached 20% or more, as in the
cases of Thailand, Tunisia, Republic of Korea, Mauritius and Malaysia. However, there
is no clear pattern of appreciating RER as MNEX/GDP rises from the miniscule levels
of less than 1% (for the cases of Nigeria, Gabon and Ghana) to about 10% for the case of
Indonesia. However, this pattern may not be generalizable, given the presence of many
CFA African countries in the sample. These are the members of the CFA monetary
union, which adopts a fixed exchange rate system vis-a-vis the French franc8. Third, again
may be due to the same reason there is no evidence of a tendency for real exchange rates
to become more overvalued (or undervalued) as the share of MNEX/GDP rises.
Second, I consider the relationship between MNEX with aggregate investment.
Notwithstanding efficiency consideration, the share of gross investment to GDP is a useful
broad indicator of an economy's potential to sustain high rates of export (as well as overall
economic) growth,. On this score most of the African countries are badly lagging behind.
Except for Mauritius -which has investment ratios at 29 - virtually all remaining African
countries have investment rates lower than 25%.
'These countries (Gabon, Togo, Cameroon, Burkina Faso, Cote d'Ivoire, Central African Republic and
Senegal) have experienced substantial real appreciation as well RER overvaluation for most of the period
since 1985 (Baffes, Elbadawi and O'Connell, 1997).
9 According to robust evidence drawn from a vast set of developing countries, a 6% real GDP growth rate would
require about 28% rate of investment (Williamson, 1997a).
5
Table 1.A: MANUFACTURING EXPORTS IN A SAMPLE OF DEVELOPING COUNTRIES
Aggregate Manufacturing % Share % Share of
Exports Exports of Total Manufacturing
Current US Current US sm Exports Exports to
_$rn to GDP GDP
Birkina 1994/1995 Average 274.95 45.90 13.10 2.19
Average Annual 8.56 18.99 1.27 9.46
Growth Rate 84-95 (%)
Cote 199411995 Average 3699.85 494.59 42.02 5.65
d'lvoire
Growth Rate 84-95 (%) 3.22 8.20 0.34 4.7
Kenya 1994/1995 Average 2815.06 432.17 36.08 6.5
Growth Rate 84-95 (%) 6.07 12.62 3.60 14.09
M/lauritius 1994/1995 Average 2179.55 1013.45 58.41 27.18
Growth Rate 84-95 (%) 15.96 22.76 2.01 7.67
S. Africa 1994/1995 Average 31122.29 11018.56 24.34 8.6
Growth Rate 84-95 (%) 5.46 12.42 0.16 8.07
Tanzania 1994/1995 Average 898.37 45.87 19.51 1.31
Growth Rate 84-95 (%) 15.04 3.00 16.55 10.59
Zimbabwe 1994/1995 Average 2677.20 615.66 26.35 9.88
Growth Rate 84-95 (%) 7.86 431 4.57 4.76
T unisia
1994/1995 Average 3475.29 3910.92 44.76 23.19
Growth Rate 84-95 (%) 18.06 18.06 3.14 9.87
Rep. 1994/1995 Average 132762.61 101757.8 31.58 24.23
Growth Rate 84-95 (%) 15.61 14.68 -0.47 -1.27
Malaysia 1994/1995 Average 72462.51 49200.77 92.59 62.89
Growth Rate 84-95 %) 15.13 26.36 5.36 16.11
rhailand 1994/1995 Average 62558.62 36892.33 40.05 23.63
Growth Rate 84-95 (%) 20.78 29.93 6.14 14.30
I ndonesia 1994/1995 Average 49849.55 21825.38 26.37 11.55
Growth Rate 84-95 (%) 8.65 24.34 0.41 15.75
Notes:
1. Exports of goods and services represent the value of all goods and other market services provided to the world. Included is the
value of merchandise, freight, insurance, travel, and other non-factor services
2 Manufactures comprise commodities in SITC revision 1, sections 5 through 9 (chemicals and related products, basic
manufactures, machinery and transport equipment, other manufactured articles and goods not elsewhere classified) excluding
division 68 (non-ferrous metals)
3. The Growth Rate 84-95(%) refers to percentage annual average growth rate between 1984-1995
6
TABLE L.B: OTHER DETERMINANTS IN A SAMPLE OF DEVELOPING COUNTRIES
Ratio of Gross Ratio of School Fax Corruption Roads
Domestic Enrollment to Machines Paved (%)
Investment to Land per worker (per 1000
GDP* people)
Burkina Faso 1994/1995 Average 2087 0.61 4 17.35
4.29 10.12 -0.47
Annual average Growth
Rate 84-95 (%)
Cote d'lvoire 1994/1995 Average 13.04 1.17 2.79 9.50
3.42 -0.04 1.99
Growth Rate 84-95 (%)
Kenya 1994/1995 Average 20.55 2.71 0.14 2.81 13.70
1.24 0.12 10.98 1.57
Growth Rate 84-95 (%)
Mauritius 1994/1995 Average 28.98 4.95 17.00 3.19 93.00
2.00 3.46 177.08
Growth Rate 84-95 (%)
S. Africa 1994/1995 Average 1795 1.13 2.11 5.64 41.50
-1.99 3.70 24.44
Growth Rate 84-95 (%)
. - 23.37 3.28 0.07 2.56 4.20
Tanzania 199411995 Average
3.14 -2.51 89.35
Growth Rate 84-95 (%)
Zimbabwe 1994/1995 Average 23.66 1.97 0.35 2.94 51.45
3.68 6.14 27.35 46.09
Growth Rate 84-95 (%)
Tunisia 199411995 Average 24.30 1.35 2.53 2.94 78.10
-2.91 5.08 58.24 0.71
Growth Rate 84-95 (%)
Korea Rep 36.55 11.37 8.67 2.38 76.90
2.02 2.05 10.82 1.40
Growth Rate 84-95 (%)
_ ~~~~ ~~41.96 3.98 3.97 4 5 75.00
Malaysia 1994/1995 Average
2.92 -1.00 70.81 1.41
Growth Rate 84-95 (%)
Thailand 1994/1995 Average 40.94 1.77 1.48 3.19 96.05
3.5 1.17 126.29 13.94
Growth Rate 84-95 (%)
_ ~~~~ ~ ~ ~~~~ ~ ~~30.50 5.84 0.36 0.56 45.85
Indonesia 1994/1995 Average .56 4.
2.02 3.96 55.49 -0.19
Growth Rate 84-95 (%)
Notes:
1. Gross domestic investment consists of outlays on additions to the fixed assets of the economy plus net changes in the level of inventories. Fixed
assets cover land improvements (fences, ditches, drains, and so on); plant, machinery, and equipment purchases; and the construction of roads,
railways, and the like, including commercial and industrial buildings, offices, schools, hospitals, and private residential buildings.
2. Fax Machines is the estimated number of facsimile machines connected to the public switched telephone network, per 1,000 people
3. Paved roads is the percentage of paved roads that have been sealed with asphalt or similar road-building material
4. Corruption is an index of corrupton around the world (high index means low corruption: Transparency Intemational).
5. Schooling to land per worker is given by the ratio of the index of primary school Enrolment divided by the ratio of Arable land /100 worker.
6. Growth rates for Fax machines, corruption and Paved roads refer to 90-95 period.
7. The Growth Rate 84-95(%) refers to percentage annual average growth rate between 1984-1995
7
Figure 1: Real Exchange Rate and Munufacturing Exports in Developing Countries (1990.95):
60
50
20
0
-10
F=MXY -U RERVR SRERMS S-RER
Notes:
1. MXY is Manufacturing Exports to GDP, RER is Real Exchange Rate, SRERMS is Real Exchange
Rate Misalignment and RERVR is Real exchange rate Variability.
2. The index of real exchange rate misalignment (RERMIS) is computed as (RER-ERER)/ERER)*1100%),
where ERER is a model-based index of the equilibrium real exchange rate. RERMIS is an index of the
extent of undervaluation (negative of overvaluation) of the real exchange rate relative to the equilibrium
level. Therefore, according to Elbadawi and Helleiner RERMIVS should be positively and robustly associated
with manufactured exports. The RERMIS and the ERER indexes are taken from Elbadawi (1998) who
constructs these indexes for 63 developing countries, based on a panel data model of the real exchange rate.
Elbadawi's approach for modeling equilibrium real exchange rates is based on estimating RER levels
consistent with 'sustainable' current account equilibrium (e.g. Edwards, 1997; Elbadawi, 1994; Williamson,
1994). Williamson (1994: p. 187) for example recommends an approach for estimating, "the set of real
effective exchange rates (or paths) needed to achieve simultaneous internal and external balance by some date
in the medium-run future, and to maintain balance thereafter." The so called "fundamental equilibrium
exchange rate"--(FEER). This FEER concept, therefore, calls for specifying (or assuming) behavioral
specifications for the fundamentals and using the real exchange rate equations in the context of a bigger
model to derive (paths) for the equilibrium real exchange rate, given the assumed (paths) for the
fundamentals. The approach adopted by Elbadawi (1998) for estimating "sustainable" fundamentals
resembles the FEER approach. In particular, the capital account fundamentals are obtained using a model
that links sustainable net capital flows and net foreign income to sustainable current account balance
(Edwards, 1997), and sustainable change in reserves to long-term import requirements. In addition,
sustainable foreign aid ratios are linked to levels that are judged to be consistent with avoiding excessive aid
dependency.
8
A far sui.erior support for exports, in terms of investment performance, is provided by
the three A71sian countries, which managed to increase their investment shares to 30% or
more to register staggering rates of 42% for Malaysia, 41% for Thailand and 31% for
Indonesia (Table 1.B).
Third, the transaction theory suggests a negative relationship between transaction costs
and MNEX. Figure 2 shows the association between MNEX and a composite index of
transaction costs. The latter is weighted index of three variables: a qualitative indicator
of corruption, length of paved roads and the number of fax machines in the country. The
weights are given by the corresponding coefficients of regression 4 of Table 2 (see notes
to Figure 2). The composite index ranges from zero (no cost) to a maximum of one. The
scatter fits a negative exponential curve, where it appears that a value of 0.5 for the
transaction index establishes an important threshold in terms of the relationship between
MNEX and transaction costs. For most countries, at levels of the index higher than this
threshold MNEX was low and was fairly invariant to changes in transaction costs. About
eleven countries, all of them from SSA, fall in this segment. Another group of countries
have had lower transaction costs than this threshold, yet their MNEX shares are lower
than the regression line. This set includes Madagascar, Malawi, Central African Republic,
Burkina Faso, Chile, and especially South Africa. While transaction costs in South Africa
are at par with that of Mauritius, its MNEX shares are less than 10%, which is only
slightly more than one third the shares for Mauritius. In the case of South Africa and
Chile, the dominance of mineral resources is clearly an important factor contributing to
this outcome. Finally, the cases of Tunisia, Thailand, Korea, Mauritius, and especially
Malaysia suggest that low transaction costs are strongly associated with high shares of
MNEX.
Fourth, a version of the endowment thesis predicts a negative relationship between the
MNEX and the stock of skills relative to natural resource endowment. The partial
correlation between the two variables for 1990-95 averages is shown in Figure 3, where
the ratio of school enrolment to land area per 100 workers was used as a proxy for the
ratio of skills relative to natural endowment. The figure shows a strong and positive
partial correlation between the two variables, albeit with a wide distribution around the
mean at low levels of MNEX. At least five patterns could be identified. First, clearly
Malaysia and to a lesser extent Thailand were able to increase their MNEX ratios to much
higher levels than predicted by the their skills ratios. Secondly, the MNEX ratios
achieved by Mauritius are very close to what the levels predicted by its skills ratios, while
Korea and to a lesser extent Tunisia have potential for further increasing their shares of
MNEX to GDP, given current skills ratios in the two countries. A third group of
countries (Chile, South Africa, Zimbabwe and Indonesia) have high potential for raising
MNEX shares to higher levels commensurate with their skills ratios. A fourth group of
nine African countries (Kenya, Ghana, Zambia, Nigeria, Togo, Cameroon, Gabon,
Madagascar and Cote d'Ivoire) are either at or close to the regression line. Finally, the
9
rernaining four countries (Burkina Faso, Tanzania, Malawi and Senegal) have actually
higher MNEX shares than their relative skills ratios would predict.
Figure 2: Transaction Cost & Manufacturing Exports (1990-95)
0.9
0.7
0.1
0 10 20 3a 40 50 60
Manufacturing Exports/GDP
Note:
Trhe composite index of transaction cost is calculated as a normalized index of TC, where TC is given by:
0.1~~~~~~~~~~~
TC = _ _ _where X 's are the average of LFAX, PROADS anld LCORR and 3's are
4,1X1 + /l12X2 + /33X3
te estimated coefficients from Table 2
The analysis of this section establishes the relevance of the four set of variables as potential
determinants of MNEX. Next I turn to a more formal behavioral analysis using panel
data.
3. Econometric Analysis of Manufactured Exports in Developing Countries
E.ach of the three theories suggests a pivotal determinant of manufactured exports. First,
WYood's endowment hypothesis suggests that a combination of high natural resource per
worker (measured by the ratio of land area per 100 worker)oL and low human capital per
worker (measured by schooling per worker) should both be negatively associated with
o This variable is a variant of the population density, which as well, has been shown to be closely
associated with the composition of exports (Perkins and Syrquin, 1989).
10
manufactured exports. Another version of the theory assumes that both of the two
factors have the same quantitative effect on exports, which leads to a restricted model with
a single endowment variable (the ratio of human capital per worker to land area per 100
worker). This restricted version of the endowment theory predicts that countries with
higher human capital per worker relative to their natural resource base per worker have
a comparative advantage in manufacturing. Both versions of the theory are assessed.
Second, Collier's transaction theory predicts that transaction costs are the dominant
factors. We account for transaction costs by three variables: index of corruption, length
of paved roads and availability of telephone and fax machines. I analyze the implications
Figure 3: Manufacturing Exports and Schooling per land/ Labor Ratio (1990-95)
120
o~~~~~~~~~~
100 a
0~~~~~~~~~~~~~9
80
0- 60 iO
10 Wrnia
40
20
0
0 10 20 30 40 60 60
Manufacturing Exports/GDP
Note:
Schooling rate to land per labor ratio is measured by the index of primary school Enrolment ratio to
land area per 100 workers.
of this theory at two levels. At the first level, I test whether these three components have
stronger effect on manufactured exports than overall aggregate investment. This is to
make the point that those components of investment designed to reduce transaction costs
relax the most critical constraints facing manufactured exports. If the prediction of the
theory was corroborated, I test whether or not transaction costs are sufficient for policy.
In particular I test for the significance of an index of real exchange rate misalignment.
The test for the real exchange rate-led export orientation approach is given by examining
whether or not real exchange rate misalignment matters for manufactures exports,
regardless of whether we control for aggregate investment or for transaction costs.
11
In addition to the above pivotal set of variables, directly suggested by the three theories,
I include other variables to account for macroeconomic instability of relevance to the
export sector (real exchange rate variability); external shocks (measured by level and
variability of terms of trade); external demand (measured by per capita GDP in OECD
countries); and regional dummies for East Asia, Latin America and Sub-Saharan Africa.
Table 2 provides estimates of manufactured export performance (given by the log of the
ratio of manufactured exports to GDP) for a panel of 41 developing countries over 1980-
199511. Regressions 1 and 2 of the Table contain results for random effects12 regressions,
where aggregate investment rather than transaction cost variables are included. Instead,
regressions 3 and 4 of the Table exclude aggregate investment but accounts for three
measures of transaction costs (corruption, length of paved roads and number of fax
machines)"3. All of regressions fit the data very well, with about 95% of variations in
manufactured export/GDP ratio explained by the model. To avoid picking spurious
effects, the dependent variable is given by the log of the ratio of manufactures exports to
GDP and all right hand side variables (other than relative prices) are expressed relative to
appropriate scale variables (see the notes to Table 2).
First, the results of regressions 1 and 3 suggest that the ratio of schooling per worker was
significantly and positively associated with manufactures exports, while the ratio of land
area per labor was very insignificant. In regressions 2 and 4 the ratio of schooling per
worker to land area per worker was highly significant and positively associated with
manufactured exports. Since the significance of this variable is obviously driven by the
schooling effect, this finding does not contradict the earlier results (of regressions 1 and
3) on the insignificance of land area per worker. This finding, therefore, permits the
conclusion that: adequately conditioning for other relevant determinants, a high ratio of
natural resource endowment per worker was not found to be associated with manufactured
export performance across countries. T7is suggests that- as far as manufactured export
performance is concerned--the endowment thesis is not corroborated by empirical evidence.
This result can not be taken as a formal rejection of the "endowment thesis", unless one
is also prepared to assume that manufactured exports to GDP was highly correlated with
manufactured to aggregate (or primary) exports. This, however, is not likely to be
implausible.
Al
Second, regressions 1 and 2 find that aggregate investment was robustly and positively
associated with manufactured exports. Similarly, regressions 3 and 4 find the index of
" Data on manufacturing exports and other related variables are obtained from the World Bank's World
Development Indicators. The data allows estimation of a panel of 41 countries for regressions 1 and 2
and 32 countries for regressions 3 and 4, over five periods: 1980-81, 1982-83, 1984-85, 1986-89, 1990-
95
12 Hausman specification tests (reported in the Tables) suggest that random effects results are superior to
the results based on the fixed effects regressions.
13 The number of telephones were found to be consistently insignificant and was therefore dropped.
12
corruption (a higher index indicates lower corruption), length of paved roads and number
of fax machines all positively associated with manufactures exports. However, the
significance levels for the three transaction cost variables are more than double the one for
aggregate investment. Moreover, regressions accounting for the simultaneous effects of
aggregate investment and transaction costs (not reported) find only the latter to be
significant.
Third, the remaining test is whether RERMIS (measured as undervaluation) is positively
and significantly associated with exports when accounting for investment or for
transaction costs. Our results find that in both cases RERMIS have had significant and
positive effect on manufactured exports.
Therefore, the combined results corroborate the basic prediction of the transaction theory
of manufactures exports: that transaction costs are major determinants of manufactures
exports and that investing on reducing these costs generates the highest payofffor the capacity
to export manufactures. However, our results also lend support to the view that: real
exchange rate-based competitiveness is a pre-requisite for a developing (especially low- income
developing) country to become a successful exporter of manufactures.
Finally, all of the four regressions find real exchange rate variability and the level effect
of the terms of trade highly significant and negatively associated with manufactured
exports. Also and as expected, terms of trade variability has a deleterious effect on
manufactured exports, though its effect was only found to be significant in the case of the
aggregate investment-version of the model (regressions 1 and 2). Moreover, A less clear
result from a theoretical perspective, was the negative elasticity of the level of terms of
trade. However, the GDP per worker in the OECD countries (a proxy for external
demand) was only marginally significant in the aggregate investment-version of the model
and was very insignificant in the transaction-version of the model. Therefore, it was
subsequently dropped from regressions 3 and 4. Lastly, all regional dummies, especially
the Africa dummy were not found to be significant. This is an important result because
it suggests that Africa is on the regression line: the gap in performance between Africa and
others, most notably East Asia, should be explained by differences in the global determinants
of manufactures exports. I turn next to this issue.
3.1 Why was Africa Marginalized in World Manufactures Exports?
In the 1990s manufactured exports by the four East Asian countries considered in this
study (Indonesia, Malaysia, Republic of Korea, Thailand) account for more than 30% of
their GDP, while Sub-Saharan Africa only managed to export about 2.9% of their GDP
during the same period. The Asian manufactured export/GDP share in the 1990s was,
therefore, more than ten times the comparable share for SSA. Table 3- based on
regression 4 of Table 2-simulates the sources that accounted for this outcome, and Figure
shows the net contribution of four categories of determinants: endowment, exchange rate
policy, transaction cost, and terms of trade. The evidence very strongly corroborates the
transaction theory, where lower transaction costs in East Asia relative to SSA in the 1990
13
TABLE 2: AN EMPIRICAL MODEL OF MANUFACTURED EXPORTS IN
DE'VELOPING COUNTRIES
Dependent Variable EQUATION EQUATION EQUATION EQUATION
L_g 1 2 3 4
Log (MXY) RANDOM RANDOM RANDOM RANDOM
COEFF. T-STAT COEFF. T-STAT COEFF. T-STAT COEFF. T-STAT
RERMIS 0.4250 2.1749 0.4422 2.273s 0.5820 1.6718 0.6009 1.7469
RERVAR -17.3195 -12.8317 -17.3846 -13.0912 -8.2117 -3.7173 -8.1503 -3.7214
Log (lNV/GNP) 0.7266 2.2145 0.7637 2.3502
Log (TO'f) -0.8786 -1.7076 -0.9398 -1.8566 -1.1567 -1.9771 -1.2207 -2.1485
TOTVAR -2.8718 -3.0116 -2.8301 -3.0012 -1.0635 -1.1113 -1.0733 -1.1308
Log (SCH) 1.0817 4.5445 0.8851 2.7426
Log (LARLAB) -12.6392 -0.7393 -11.6882 -0.5641
Log (SCHLAR) 1.0715 4.4827 0.8568 2.6891
OECYB 0.00002 -1.3429 0.00002 -1.2900 0.00003 1.8980 0.00004 2.0335
Log (CORR) 1.3265 5.6388 1.3304 5.7010
Log (PROAD) 0.6333 4.7872 0.6419 4.9033
Log (FAX) 0.4640 4.0391 0.4839 4.4217
DSSA 0.0199 0.2374 0.0198 0.2341
DEA 0.1700 1.4220 0.1839 1.5518
DLAC 0.7880 1.0805 0.0878 1.2127
CONSTANT 0.4427 0.3049 0.5369 0.3737 2.8234 -1.8473 -2.7415
Adjusted R Squared 0.8660 0.8722
R squared 0.9504 0.9511
P Vlalue 0.0000 0.0000 0.0000 0.0000
Nurmber of Observation 82 82 64 64
Number of Countries 41 41 32 32
Period of Estimation:
1980-81, 1982-83, 1984-85,
1986-89, 1990-95
1Note:
RER Real Exchange Rate GDI Gross Domestic Investment
SRERMS Real Exchange Rate Misalignment CORR Index of corruption
RERVR Real Exchange Rate Variability PROAD Paved Roads
TOT Terms of Trade FAX No. of Fax Machines per 1000.
TOTVR Terms of Trade Variability OECYB GDP of OECD Countries
J. SCH Index of Primary School Enrolment DSSA Dummy for Sub Saharan Africa
ARLAB Arable Land / Labor Ratio DEA Dummy for East Asia
SALAB Schooling per land per labor Ratio DLAC Dummy for Latin America
P Value Refers to the Hausman test for Fixed vs Random Effects Model
14
TABLE 3: THE EXTENT AND SOURCES OF AFRICA'S SHORTFALLS IN
MANUFACTURED EXPORTS RELATIVE TO EAST ASIA (1990-95)
(1) (2) (3) (4)
East Asia Sub Sahara Africa Difference Net Contribution
MX/GDP -0.5121 -1.5353 1.0232 10.55
RER Variability -0.1125 -0.4238 0.3113 3.28
RER Misalignment 0.0070 0.0489 -0.0419 -0.44
Exchange Rate Policy 2.84
Terms of Trade -2.4216 -2.3919 -0.0297 -0.31
Terms of Trade Variability -0.0196 -0.0349 0.0153 0.16
External TOT eflfect -0.15
Corruption 0.6696 0.6224 0.0472 0.50
Number of Faxes 0.2189 -0.2816 0.5005 5.28
Proportion of Paved roads 0.9024 0.6254 0.2770 2.92
Transaction Benefits 8.70
Skills to Land Ratio 1.6393 1.5109 0.1284 1.36
Endowments 1.36
Total Predicted (MX/GDP) 12.75
Actual 10.55
Residual 2.20
SouTce: Regression 4 of Table 2
Notes:
1. Column 1(2) is the fitted right-hand side components of Regression 4 of Table 2, using averages for E. Asia (Africa)
2. Column (3) is the difference between East Asia and Africa ((1)- (2))
3. Column (3) is based on the following expression:
logt YEA ) = (XI - Xl ) + /32(X2 - X2R +
9YAFR
Where YEA(YAFR) = (MANEXIGDP) in East Asia (Africa)
A simple Taylor's expansion of log YEA around 1 leads to the following expression:
(YAFR )
(YEA '8 _ (YA __Y_
( Y -) /X1 ( X ~ 9 I AFR ) /3+ A2 (X2S -X2 .i..... + Residual
AFR YAIFRAF
4. Columnn (4) gives the components of Y YEX )based on the above approximation.
K YAFR )
15
Figure 4: The Extent and Sources of Africa's Shorffall in Manufacutures Exports Relative to
East Asia (1 990-95)
12
10~~~~~~~~~~~~~~~~~~~~~~~~0
8
.2
Source: Table 3.
allowed the share of manufactured exports to GDP in the former to be as high as 8.7 times
the share of SSA manufactured exports to its GDP. In particular, the number of faxes
accounts for half of the shortfall of Africa's share of manufactured exports relative to that
of East Asia. However, this result should be interpreted as a proxy for the overall effect
on manufactured exports of communication and other communication-intensive inputs
(such as managerial practices, flow of information... etc). East Asia also outperformed
SSA in terms of real exchange rate stability, which more than compensated for Africa's
advantage in the area of exchange rate competitiveness. The net effect of exchange rate
X ~~~policy allowed East Asia to achieve manufactured export shares at about 2.8 times those
of SSA. Assuming that there were no differences between East Asia and Africa in other
determinants, East Asia's superior performance in these two main sets of policy variables
would predict the share of East Asia's manufactured exports to be about 11.5 times that
of SSA.
On the other hand, East Asia's advantage relative to Africa in terms of the ratio of skills
per worker relative to land per 100 workers (endowment thesis) predicts the share of
Asian manufactured exports to be about 1.4 times that of SSA. The results also show that
16
terms of trade effects were favorable to Africa, however, the net effect was too small to
make any measurable impact.
4. Conclusions
This paper analyzes the determinants of manufactured exports in Africa and other
developing countries, guided by three pivotal views on the prospects for Africa in
manufactured exports. According to Adrian Wood and his associates, Africa cannot have
a comparative advantage in exporting of labor-intensive manufacturing--even if broadly
defined to include processing of raw materials-because of its higher endowment of natural
resources relative to human capital. On the other hand, Paul Collier argues that, for at
least the majority of Africa, unusually high, and policy-induced, transactions costs are the
main cause of its comparative disadvantage in manufactures exports. Both approaches are
directly based on a specific interpretation of the Hecksher-Ohlin model, which makes the
fundamental prediction that comparative advantage will reflect differences in relative
endowments. The third approach emphasizes stable and competitive real exchange rates
for profitability of exports. All of the three views are very much influenced by the impact
of globalization. The policy implication for Africa's development of the Wood's thesis
is very dramatically different from the other two views.
The empirical results--based on a panel of 41 developing countries, of which eleven from
Sub-Saharan Africa---suggest five important conclusions. First, this paper's empirical
analysis suggests that, after adequately controlling for other relevant determinants, a high
ratio of natural resource endowment per worker was not found to be robustly associated
with manufactured export to GDP across developing countries. To the extent that GDP
was strongly correlated with aggregate (or primary) exports, this finding permits the
conclusion that the "endowment thesis" was not corroborated by empirical evidence.
Second, our results corroborate the basic prediction of the "transaction theory" that
transaction costs are major determinants of manufactured exports and that investing on
reducing these costs generates the highest payoff for the capacity to export manufactures.
Third, however, our results also lend support to the view that: real exchange rate-based
competitiveness is a pre-requisite for a developing (especially low- income developing)
country to become a successful exporter of manufactures. Fourth, as far as manufactured
exports are concerned there was no evidence that Africa is different. Therefore, Africa's
is on the regression line, which suggests that the gap in performance between Africa and
others, most notably East Asia, should be explained by differences in the global
determinants of manufactured exports. Fifth, the simulation exercise-- based on the
manufactured export regressions--sheds some useful insight as to why Africa is
marginalized in world manufactured exports. Fifth, East Asian manufactured export/GDP
share in the 1990s was more than ten times the comparable share for SSA. Simulations
of the net contribution of four categories of determinants: endowment, exchange rate
policy, transaction cost, and terms of trade provide very strong support for the transaction
theory. The evidence suggests that bad policy, especially in areas that affect transaction
cost, rather than adverse endowment, remains the most serious hurdle for Africa to pass
17
before it can build comparative advantage in the international market for manufactured
exports.
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